If I buy supplies and services in my own name and bill my clients for them, do I owe New Mexico gross receipts tax on the reimbursement?

Plain-English summary

A consultant who bought lab work, equipment, and supplies in her own name and then billed her clients for those costs owed gross receipts tax on the full amount she collected — including the reimbursed costs. She was not a "disclosed agent," it was not illegal double taxation, and neither confusing tax rules nor the Department's later acceptance of a similar explanation excused the tax, penalty, or interest. Protest DENIED.

Patricia Young ran WasteStream Resources, a sole proprietorship in the environmental-consulting business advising owners of small wastewater systems. She sampled and monitored wastewater and bought the equipment, supplies, and laboratory services her clients' facilities needed. She bought all of it in her own name — vendors billed her and looked to her for payment — then invoiced each client for her labor plus the cost of those purchases plus a 10% service fee. She paid gross receipts tax on her labor and the 10% fee, but not on the reimbursed cost of the third-party goods and services.

After a limited-scope audit of her 1995 taxes, the Department assessed $2,813.22 in tax, penalty, and interest; a partial abatement (for work she did for a Native American enterprise on tribal land) left a balance of $1,526.12 in tax plus penalty and interest. She protested on four grounds.

1. She was not a "disclosed agent," so the reimbursements were taxable

Gross receipts do not include amounts a person receives "solely on behalf of another in a disclosed agency capacity" (Section 7-9-3(F); Regulation 3 NMAC 2.1.19.3.1). But that exclusion applies only when the person can legally bind the client to the purchase, so the vendor could enforce payment against the client. Here, Young bought in her own name, the vendors could only look to her (not her clients) for payment, she sometimes did not tell vendors which client a purchase was for, and she bought some items in bulk. She was therefore not a disclosed agent, and the reimbursements were gross receipts subject to tax.

2. This is not illegal "double taxation"

Young argued she was taxed on the same money the vendors were taxed on. The hearing officer explained there is no prohibition on double taxation in New Mexico (New Mexico State Board of Public Accountancy v. Grant and others), and in any event there is no double taxation when the two taxes fall on different taxpayers (House of Carpets): the vendor owes tax on its sale to Young, and Young owes tax on her separate sale to the client. Passing the tax along in the price does not shift the legal liability. To prevent tax "pyramiding," Young could apply for nontaxable transaction certificates and give them to her vendors for the goods and services she genuinely resells (Sections 7-9-47 and 7-9-48) — but that relieves the vendors, not her.

3. The Department's later acceptance of a similar explanation did not bind it

The Department had accepted Young's identical explanation for her 1994 taxes and issued no assessment; for 1995 it decided the reimbursements were taxable. Young argued she was misled. But this was not a case of paying tax and then stopping in reliance on Department advice — she had made her own decision in 1995 that the tax was not due, and the Department did not contact her until 1998, three years later. Advice or acceptance that comes after the transactions cannot support estoppel (Wing Pawn Shop). So the after-the-fact history did not excuse the 1995 tax.

4. "The tax laws are too complex" did not waive penalty or interest

A hearing officer cannot relieve a taxpayer of obligations the Legislature imposed. Interest under Section 7-1-67 is mandatory — the statute says interest "shall" be paid on late tax (State v. Lujan), with no exceptions, and even a formal extension does not stop it (Section 7-1-13(E)). The negligence penalty under Section 7-1-69(A) applied because Young's failure rested on an erroneous belief that the tax was not due, which fits the negligence definition (Regulation 3 NMAC 1.11.10). Taxpayers must determine and report their own liabilities (Section 7-1-13(B); Tiffany Construction), and consulting an adviser only after an audit — as Young effectively did — does not avoid the penalty (Sonic Industries).

Result: protest DENIED.

What this means for you

Buying "for" a client in your own name makes the reimbursement your taxable receipt

If you purchase goods or services in your own name and bill a client for them, that reimbursement is part of your gross receipts. The disclosed-agency exclusion is narrow: it applies only when you can legally bind the client to the purchase so the vendor could enforce payment against the client directly. Ordinary "I bought it and billed you back" arrangements do not qualify.

"I was already charged tax by my vendor" is not a defense

New Mexico taxes successive transactions, and there is no double-taxation bar when the tax falls on different sellers. Your vendor owes tax on its sale to you; you owe tax on your sale to your client. If you truly resell items, the fix is to give your vendors a nontaxable transaction certificate — that removes the vendor-level tax, not yours.

A prior year the Department "let go" is not a promise about future years

The Department accepting an explanation one year does not lock it in, and guidance you receive after the tax was due cannot be relied on to escape it. Estoppel against the Department requires a representation before the transactions, and the taxpayer here had simply decided on her own that the tax was not owed.

Complexity does not waive penalty or interest — timely diligence does

Interest is mandatory whenever tax is late, and the negligence penalty turns on whether you exercised ordinary care at the time the tax was due. Reviewing the regulations or consulting an accountant specifically about the issue before you file is what avoids the penalty; doing so only after an audit does not.

Common questions

Q: I buy materials and services for my clients and bill them at cost plus a fee. Do I owe gross receipts tax on the reimbursed cost?
A: Yes, unless you were a true disclosed agent — able to bind the client so the vendor could collect from the client directly. Buying in your own name and billing the client back makes the whole amount your taxable gross receipts.

Q: My vendor already charged me gross receipts tax. Isn't taxing me again double taxation?
A: No. The vendor's sale to you and your sale to your client are separate transactions with different taxpayers, and New Mexico has no bar on double taxation anyway. For items you resell, give your vendors a nontaxable transaction certificate to remove the vendor-level tax.

Q: The Department accepted my explanation in a prior year. Can it change its mind?
A: Yes. Accepting an explanation one year does not bind the Department for other years, and advice received after the tax was due cannot be relied on to avoid it. That is not the kind of prior representation that supports estoppel.

Q: The rules are genuinely confusing. Can't the hearing officer waive the penalty and interest?
A: No. Interest is mandatory on any late tax, and the penalty depends on whether you took ordinary care to determine your liability when the tax was due. Complexity alone is not an excuse; consulting the regulations or an adviser about the specific issue beforehand is what protects you.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-4 — imposes gross receipts tax on persons engaging in business in New Mexico
• NMSA 1978, § 7-9-3(F) — defines "gross receipts"; excludes amounts received solely on behalf of another in a disclosed agency capacity
• NMSA 1978, § 7-1-17(C) — a Department assessment is presumed correct
• Regulation 3 NMAC 2.1.19.3.1 — reimbursed expenditures are gross receipts unless incurred as agent for a disclosed principal (agency exists only where the person can bind the principal to a third party)
• NMSA 1978, §§ 7-9-47, 7-9-48 — resale deductions for tangible personal property and for services, supported by nontaxable transaction certificates
• NMSA 1978, § 7-1-67 — interest "shall" be paid on tax not paid when due, without exception
• NMSA 1978, § 7-1-13(E) — interest is owed from the original due date even with an extension of time to pay
• NMSA 1978, § 7-1-69(A) — penalty for failure to pay due to negligence or disregard of rules (Regulation 3 NMAC 1.11.10 defines negligence)
• NMSA 1978, § 7-1-13(B) — taxpayers must determine and accurately report their own liabilities

Cases cited:

• New Mexico State Board of Public Accountancy v. Grant, 61 N.M. 287, 299 P.2d 464 (1956); Amarillo-Pecos Valley Truck Line v. Gallegos, 44 N.M. 120, 99 P.2d 447 (1940); State ex rel. Attorney General v. Tittmann, 42 N.M. 76, 75 P.2d 701 (1938); Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920) — there is no general prohibition against double taxation
• House of Carpets, Inc. v. Bureau of Revenue, 87 N.M. 747, 507 P.2d 1078 (Ct. App. 1973); New Mexico Sheriffs & Police Ass'n v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App. 1973) — no double taxation where the taxes fall on different taxpayers
• Wing Pawn Shop v. Taxation and Revenue Dep't, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991) — a departmental communication received after the transactions cannot support estoppel
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" makes interest mandatory
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976) — a taxpayer's lack of knowledge or erroneous belief can be negligence where no adviser was consulted
• Sonic Industries, Inc. v. Taxation and Revenue Dep't, Ct. App. No. 20,676 (filed July 3, 2000) — consulting an adviser only after an audit does not avoid the penalty
• El Centro Villa Nursing Center v. Taxation and Revenue Dep't, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989) — taxpayer bears the burden to overcome the presumption that an assessment is correct

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Wastestream Resources
• Decision PDF: D&O 00-19

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
WASTESTREAM RESOURCES No. 00-19
NM ID NO. 02-224688-00 6
ASSESSMENT NO. 2324585

DECISION AND ORDER

A formal hearing on the above-referenced protest was held June 22, 2000, before Margaret

B. Alcock, Hearing Officer. WasteStream Resources was represented by its owner, Patricia A.

Young (“Taxpayer”). The Taxation and Revenue Department ("Department") was represented by

Monica M. Ontiveros, Special Assistant Attorney General. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a sole proprietorship engaged in the environmental consulting

business. The Taxpayer advises owners of small wastewater systems, acts as a liaison between

system owners and engineers and, in some cases, acts as the operator of her client’s wastewater

treatment facilities.

2. During 1995, the Taxpayer’s services included sampling and monitoring wastewater

in accordance with government regulations and selecting and purchasing the equipment and supplies

needed to operate her clients’ treatment facilities.

3. All laboratory services, equipment and supplies ordered by the Taxpayer were billed

directly to the Taxpayer, and the vendors looked to the Taxpayer for payment. Although the name of

the Taxpayer’s client was listed on the paperwork given to each laboratory to establish the chain of
custody for wastewater samples, the laboratory sent its invoices to the Taxpayer and it was her

responsibility to pay the laboratory’s charges.

4. The vendors who sold equipment, supplies and laboratory services to the Taxpayer

included the New Mexico gross receipts tax as part of the price charged to the Taxpayer.

5. The Taxpayer invoiced each client for labor charges and the cost of laboratory

services, equipment and supplies she purchased or leased for use in the client’s wastewater treatment

facility. By express agreement with her clients, the Taxpayer added a ten percent service fee to the

cost of services and materials purchased from third parties. This fee was designed to compensate the

Taxpayer for her expertise and the time she spent selecting the appropriate vendor and making the

purchase.

6. The Taxpayer’s invoices included gross receipts tax on labor charges and the ten

percent service fee on purchases from third parties. The Taxpayer did not include gross receipts tax

on her charges for services and materials purchased from third parties.

7. Consistent with her invoicing methods, the Taxpayer reported and paid gross receipts

tax on her receipts from labor and service fees, but did not report or pay gross receipts tax on

amounts she received from her clients as reimbursement for the cost of services and materials

purchased from third parties.

8. The Taxpayer’s 1995 federal income tax return reported all receipts from her

environmental consulting business as business income on Schedule C to Form 1040, including the

amount of reimbursed expenses.

9. In September 1998, the Department sent the Taxpayer notice that it was conducting a

limited scope audit of her 1995 gross receipts taxes and asked her to explain why the receipts

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reported on her 1995 gross receipts tax returns were lower than the receipts reported as business

income on her 1995 federal income tax return.

10. In January 1998, the Taxpayer had received a similar inquiry from the Department

concerning her 1994 gross receipts taxes. The Taxpayer responded to that inquiry with a letter

explaining that the discrepancy between the income reported for state gross receipts tax purposes and

the income reported for federal income tax purposes was attributable to reimbursements received for

goods and services purchased on behalf of her clients. The Department accepted the Taxpayer’s

explanation and no assessment was issued against her for tax year 1994.

11. When the Taxpayer received the Department’s inquiry concerning her 1995 gross

receipts taxes, she responded with a letter of explanation that was virtually identical to the letter sent

in response to the inquiry concerning her 1994 taxes. This time, however, the Department employee

assigned to the audit requested more information to establish that the Taxpayer’s receipts were not

subject to gross receipts tax.

12. The Taxpayer subsequently met with the employee and the employee’s supervisor in

Albuquerque to discuss the matter. The Department’s employees were uncertain as to whether the

Taxpayer’s receipts from reimbursed expenses were subject to tax and told the Taxpayer they would

have to refer the matter to Santa Fe.

13. The Taxpayer did not hear anything further from the Department concerning the

taxability of her receipts until December 17, 1998, when the Department issued Assessment No.

2324585 to the Taxpayer in the total amount of $2,813.22, representing gross receipts tax, penalty

and interest due for tax periods January through December 1995.

14. On January 8, 1999, the Taxpayer filed a written protest to the Department’s

assessment.

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15. Based on additional information provided by the taxpayer, the Department made a

partial abatement of tax, penalty and interest attributable to services the Taxpayer performed for an

Native American enterprise operating on tribal land. The current balance remaining on the

assessment is $1,526.12 gross receipts tax, plus penalty and interest.

DISCUSSION

The Taxpayer challenges the Department’s assessment on the following grounds: (1) the

Taxpayer was purchasing goods and services as an agent for her clients and should not be liable for

gross receipts tax on these reimbursed expenses; (2) imposing tax on the Taxpayer’s reimbursed

expenses results in double taxation; (3) the Taxpayer should be excused from payment of the tax

because she was ill-advised by the Department; and (4) the Taxpayer should be excused from payment

of penalty and interest because the tax laws are too complex for the average taxpayer to understand.

Section 7-1-17(C) NMSA 1978 provides that any assessment of tax by the Department is

presumed to be correct. Section 7-1-3(U) NMSA 1978 defines tax to include not only the amount of

tax principal imposed but also, unless the context otherwise requires, “the amount of any interest or

civil penalty relating thereto.” Accordingly, the Taxpayer has the burden of producing evidence to

establish that the Department's assessment of gross receipts tax, penalty and interest for tax year

1995 is incorrect. See also, El Centro Villa Nursing Center v. Taxation and Revenue Department, 108

N.M. 795, 779 P.2d 982 (Ct. App. 1989).

(1) Tax on Reimbursed Expenses. Section 7-9-4 NMSA 1978 imposes an excise tax

on the gross receipts of any person engaging in business in New Mexico. Section 7-9-3(F) defines

the term “gross receipts” to include receipts from selling property in New Mexico, leasing property

employed in New Mexico or selling services performed in New Mexico. The term "gross receipts"

does not include amounts received solely on behalf of another in a disclosed agency capacity.

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Regulation 3 NMAC 2.1.19.3.1 provides the following explanation concerning reimbursements of

expenses a taxpayer incurs on behalf of a client:

19.3 REIMBURSED EXPENDITURES:
19.3.1 The receipts of any person received as a reimbursement of expenditures
incurred in connection with the performance of a service or the sale or lease of
property are gross receipts as defined by Subsection F of Section 7-9-3, unless
that person incurs such expense as agent on behalf of a principal while acting in a
disclosed agency capacity. An agency relationship exists if a person has the
power to bind a principal in a contract with a third party so that the third party
can enforce the contractual obligation against the principal.

In this case, the Taxpayer would be acting in a disclosed agency capacity only if she were authorized

to legally bind her client to the terms of any purchase contract she entered into on the client’s behalf.

In that situation the client—not the Taxpayer—would be primarily liable for payment of the goods

and services purchased.

Based on the facts presented at the hearing, the Taxpayer was not acting in a disclosed

agency capacity in 1995. Instead, the Taxpayer was purchasing goods and services in her own name

and either reselling those items to her clients or using the purchased items in the performance of her

own services. Although a laboratory hired to analyze wastewater samples might have known the

identity of the Taxpayer’s client, the laboratory had no legal basis to sue the client if the Taxpayer

failed to pay the laboratory’s charges. Nor did vendors of equipment and supplies purchased by the

Taxpayer have the right to enforce payment against the Taxpayer’s clients. At the hearing, the

Taxpayer testified that she did not always tell vendors the name of the client for whom she was

purchasing goods. In some cases, items were bought in bulk and the vendor had no way of knowing

which items would be used by the Taxpayer in performing services for a particular client. Given

these facts, the payments the Taxpayer received as reimbursement for expenditures made on behalf

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of her clients were not received in a disclosed agency capacity and were gross receipts subject to tax.

(2) Double Taxation. The Taxpayer argues that imposing tax on her reimbursed

expenses results in double taxation because the vendors who sold equipment, supplies and laboratory

services to the Taxpayer included the gross receipts tax as part of the purchase price. It is a popular

misconception that there is something inherently illegal or unconstitutional with double taxation. In

fact, New Mexico’s courts have held, on numerous occasions, that there is no prohibition against

double taxation. See, e.g., New Mexico State Board of Public Accountancy v. Grant, 61 N.M. 287, 299

P.2d 464 (1956); Amarillo-Pecos Valley Truck Line, Inc. v. Gallegos, 44 N.M. 120, 99 P.2d 447 (1940);

State ex rel. Attorney General v. Tittmann, 42 N.M. 76, 75 P.2d 701 (1938). See also, Ft. Smith

Lumber Co. v. Arkansas, 251 U.S. 532 (1920).

In construing the New Mexico Gross Receipts and Compensating Tax Act, the New Mexico

courts have also held there is no double taxation where the two taxes complained of are imposed on

the receipts of different taxpayers. See, House of Carpets, Inc. v. Bureau of Revenue, 87 N.M. 747,

507 P.2d 1078 (Ct. App. 1973); New Mexico Sheriffs & Police Association v. Bureau of Revenue, 85

N.M. 565, 514 P.2d 616 (Ct. App. 1973). That is the case here. When a vendor sells goods or

services to the Taxpayer, the vendor is the entity liable for gross receipts tax on the sale—the

Taxpayer has no obligation to report or pay tax on the vendor’s receipts. When the Taxpayer charges

her clients for the goods and services purchased from third parties, the Taxpayer is the entity liable

for gross receipts tax on these transactions—neither the vendor nor the client has any obligation to

report or pay tax on the Taxpayer’s receipts. Although it is common practice for a seller to pass the

cost of the gross receipts tax on to the buyer, this does not change the legal incidence of the tax. If

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the buyer refuses or neglects to pay the amount of the passed-on gross receipts tax, the seller is still

responsible for paying the tax to the state.

Even though taxing successive transactions is not double taxation, the New Mexico legislature

has provided a number of statutory deductions to prevent the pyramiding or stacking of the gross

receipts tax. For example, it has provided a deduction for the sale of tangible personal property for

resale when the purchaser of the property provides the seller with a nontaxable transaction certificate

(NTTC) and represents that the property will be resold. Section 7-9-47 NMSA 1978. There is also a

deduction for the sale of services for resale when certain statutory conditions are met. Section 7-9-48

NMSA 1978. To the extent the Taxpayer is purchasing goods and services for resale to her clients (as

opposed to using the items in the performance of her own services) the Taxpayer is eligible to apply to

the Department to obtain NTTCs to give to her vendors. This would allow the vendors to deduct their

receipts from the sale of goods and services to the Taxpayer and eliminate the vendors’ gross receipts

tax on these sales.

(3) Erroneous Advice from the Department. The Taxpayer contends she should be

excused from payment of additional gross receipts tax because she was ill-advised by a Department

employee. The Taxpayer was first contacted by the Department in January 1998. At that time, the

Department asked the Taxpayer to explain the discrepancy between the receipts reported on her 1994

gross receipts tax returns and the receipts reported as business income on her 1994 federal income

tax return. The Taxpayer responded with a letter explaining that the discrepancy was attributable to

reimbursements received for goods and services purchased on behalf of her clients. The Department

accepted the Taxpayer’s explanation and no assessment was issued against her for tax year 1994.

When the Taxpayer received the Department’s inquiry concerning her 1995 gross receipts taxes, she

responded in the same way. This time, however, the Department determined that her reimbursed

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expenses were subject to gross receipts tax and issued the assessment that is the subject of this

protest.

In her protest letter, the Taxpayer expressed her concern that the Department’s failure to advise

her correctly concerning her 1994 gross receipts taxes prevented her from obtaining timely NTTCs

from her vendors. Under the facts of this case, the Taxpayer could not have avoided tax on her receipts

through the use of NTTCs. As discussed in Section (2) above, the Taxpayer may be entitled to give

NTTCs to its vendors—there is no basis for the Taxpayer to accept NTTCs from those vendors. If the

Taxpayer had given NTTCs to its vendors in 1995, the vendors could have deducted their receipts from

selling goods and services to the Taxpayer. The Taxpayer still would have been liable for gross

receipts tax on her receipts from her clients, including amounts received as reimbursement for the cost

of goods and services purchased from third parties.

This is not a situation where the Taxpayer was paying tax on her receipts and then stopped in

reliance on advice received from the Department. The Taxpayer made her own determination that

gross receipts tax was not due on her reimbursed expenses. It was not until 1998, three years after the

taxes at issue were due, that the Taxpayer was contacted by the Department. In Wing Pawn Shop v.

Taxation and Revenue Department,, 111 N.M. 735, 742, 809 P.2d 649, 656 (Ct. App. 1991), the court

of appeals addressed a similar fact pattern as follows:

Taxpayer argues that we may apply estoppel principles against the department
if it misled taxpayer into thinking he did not owe the tax and he justifiably
relied on the department to his detriment.... In support of his argument that
estoppel principles are relevant here, taxpayer maintains that, before the audit
period in question, representations justifying estoppel were made by the
department.... Yet, taxpayer relies solely on the undated letter he received in
1986 in response to his protest. The record is absent of any prior
representations, aside from taxpayer's bald assertion that they were made.

We reject taxpayer's estoppel arguments for two reasons. First, the undated
letter, even if we assume that it misled taxpayer into believing the sale proceeds

8
were not subject to gross receipts tax, was transmitted to him after, not before,
the transactions in question occurred. It is difficult for us to fathom how a
departmental communication to taxpayer after he had failed to pay gross
receipts tax can be reasonably relied on for application of estoppel principles....
(emphasis the court’s)

The advice the Taxpayer received from the Department in 1998 cannot serve as a basis to excuse the

Taxpayer from payment of gross receipts taxes due in 1995.

(4) Complexity of the Tax Laws. The Taxpayer contends the tax laws are too complex

for the average taxpayer to understand and asks the hearing officer to waive the penalty and interest

assessed against her. Neither the Department nor the Department’s hearing officer has the authority to

relieve taxpayers of obligations imposed by the legislature. The hearing officer is limited to construing

the tax statutes as written and applying those statutes in accordance with legislative intent. The hearing

officer may not rewrite the language of the statutes or second-guess the wisdom of the legislature’s

enactments.

Interest. Section 7-1-67 NMSA 1978 governs the imposition of interest on late

payments of tax and provides, in pertinent part:

If any tax imposed is not paid on or before the day on which it becomes due,
interest shall be paid to the state on such amount from the first day following
the day on which the tax becomes due, without regard to any extension of time
or installment agreement, until it is paid... (emphasis added).

The legislature’s use of the word “shall” indicates that the assessment of interest is mandatory rather

than discretionary. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977). The legislature has directed the

Department to assess interest whenever taxes are not timely paid and has provided no exceptions to the

mandate of the statute. The assessment of interest is not designed to punish taxpayers, but to

compensate the state for the time value of unpaid revenues. The reason for a late payment of tax is

irrelevant to the imposition of interest. Even taxpayers who obtain a formal extension of time to pay

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tax are liable for interest from the original due date of the tax to the date payment is made. Section

7-1-13(E) NMSA 1978.

In this case, the Taxpayer failed to pay gross receipts taxes due on her receipts from

reimbursed expenses. Although it is clear the Taxpayer is an honest person who had no intent to

cheat the state, it is also clear the taxes were due and owing. Under the provisions of Section 7-1-67

NMSA 1978, imposition of interest is mandatory.

Penalty. Section 7-1-69 NMSA 1978 governs the imposition of penalty. Sub-section

A imposes a penalty of two percent per month, up to a maximum of ten percent, when a taxpayer

fails “due to negligence or disregard of rules and regulations” to pay taxes in a timely manner.

Taxpayer negligence for purposes of assessing penalty is defined in Regulation 3 NMAC 1.11.10 as:

1) failure to exercise that degree of ordinary business care and
prudence which reasonable taxpayers would exercise under
like circumstances;

2) inaction by taxpayers where action is required;

3) inadvertence, indifference, thoughtlessness, carelessness,
erroneous belief or inattention.

The Taxpayer’s failure to pay gross receipts tax was due to her erroneous belief that tax was not due on

reimbursed expenses. This comes within the definition of negligence. The Taxpayer maintains the tax

laws were too complex for her to understand. There was no evidence presented, however, to explain

exactly what efforts the Taxpayer made to determine the extent of her tax obligations.

Whether a taxpayer has acted negligently for purposes of the penalty imposed by Section 7-1-

69 NMSA 1978 is determined as of the date the taxes were due. The Department has a regulation—

which was in effect in 1995—that discusses when reimbursed expenses are subject to tax. See,

Regulation 3 NMAC 2.1.19.3.1, quoted in Section (1), above. There is no evidence the Taxpayer

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reviewed this or any other regulation prior to filing her 1995 gross receipts tax returns. There is no

evidence the Taxpayer had any discussions with employees of the Department in 1995. Although the

Taxpayer testified that her accountant prepared her 1995 income tax returns, there is no evidence the

Taxpayer had any specific discussions with her accountant concerning the method she used to report

her 1995 gross receipts taxes.

The New Mexico courts have held that it is the obligation of taxpayers, who have the most

direct knowledge of their business activities, to determine their tax liabilities and accurately report

those liabilities to the state. See, Section 7-1-13(B) NMSA 1978; Tiffany Construction Co. v. Bureau of

Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348

(1977). A taxpayer’s lack of knowledge or erroneous belief concerning the tax laws may constitute

negligence when the taxpayer has failed to consult with an attorney or an accountant. Id. As confirmed

in a recent decision of the court of appeals, this consultation must occur at the time the taxes are due:

Where the taxpayer ignores its tax obligations and consults with an attorney or
accountant about its tax obligations only after an audit and assessment by the
Department, such conduct is not evidence of a diligent protest and does not
provide a basis for avoiding a penalty. (emphasis the court’s)

Sonic Industries, Inc. v. Taxation and Revenue Department, Court of Appeals Docket No. 20,676,

Slip Opinion page 14 (filed July 3, 2000). Here, the Taxpayer’s discussions with the Department and

her various tax advisers concerning her 1995 gross receipts tax liability occurred more than three

years after the taxes were due. Regardless of the complexity of the tax law at issue, these after-the-

fact discussions do not support a waiver of penalty.

CONCLUSIONS OF LAW

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1. The Taxpayer filed a timely, written protest to Assessment No. 2324585, and

jurisdiction lies over the parties and the subject matter of this protest.

2. The reimbursements the Taxpayer received from her clients for goods and services

purchased from third parties were not received solely on behalf of another in a disclosed agency

capacity. These reimbursements were receipts from engaging in business and were subject to gross

receipts tax.

3. The imposition of gross receipts tax on the Taxpayer’s reimbursed expenses does not

constitute illegal or unconstitutional double taxation.

4. The Taxpayer’s receipt of erroneous advice from a Department employee more than

three years after the date the taxes at issue were due does not provide a basis for abating the tax,

penalty or interest assessed.

5. The Taxpayer was late in paying gross receipts taxes due to the state and interest was

properly assessed pursuant to Section 7-1-67 NMSA 1978.

6. The Taxpayer was negligent in failing to pay gross receipts tax on her reimbursed

expenses and penalty was properly assessed pursuant to Section 7-1-69 NMSA 1978.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

DATED July 11, 2000.

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